Where Is All This Corporate Cash Going?

Today's tepid jobs report had Henry Blodgett, former Wall Street analyst and editor in chief at Business Insider, calling for a new union movement in America. The post-Crisis refrain continues — U.S. companies are reporting record profits and fantastic margins while creating few jobs and paying some workers so little that they punch in poor and punch out poor and also tired.

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In the employment and wages discussion, corporate profits and margins rightly get the majority of attention. The argument at its most basic is that if American companies are raking it in, their workers should benefit. If workers are struggling, we have to wonder whether or not those profit margins are coming at the expense of labor. In 1970, economist Milton Friedman wrote in The New York Times that the sole "social responsibility of business is to increase its profits." This doctrine is now at work so that labor is paid, for the most part, not more than is required to keep them from quitting all at once and mucking up the enterprise.

America's record high corporate margins are the result of higher expectations for labor output (more work) for less money (lowest possible wages paid to the fewest possible employees). We know this not because it feels right but because, every quarter, America's management teams gather investors and analysts on the phone to discuss earnings and operations. Yesterday, Goldman Sachs released its "Beige Book," a compendium of those discussions, gathering insights from executives of 56 S&P 500 companies, representing 37% of the value of the index (these are the companies that have reported second quarter earnings so far).

Goldman reports that firms are "pulling all available levers to support margins." This means, in practice, that companies have, "continued to focus on pricing, cost controls and efficiency gains, with varying degrees of success."

While we might talk about employees working harder for as little money as possible, the polite terms on Wall Street are "cost controls and efficiency gains." The margins represent what's happening in business right now. Margins have been high ever since the recovery because companies shed so many employees during the Great Recession and were able to mobilize much smaller cost centers (oops, I mean labor forces) into the recovery. If you lost colleagues during the crisis, took on their work and never got a raise, you know exactly what I mean. But let's look beyond margins.

Where is all of this money going? The second quarter reporting season is underway but at the end of the first quarter, according to FactSet, the S&P 500 companies, excluding the financial companies that have complicated balance sheets that would obscure our view, had $1.3 trillion in ready cash. Meanwhile, capital expenditures (building new plants, starting projects, hiring people, leasing equipment) grew at its slowest rate in 3 years. No doubt, cash is nice to have in a storm and the Financial Crisis has hammered home the importance of a rainy day fund, but all of this cash will not sit idle forever.

One little-noticed item in the most recent jobs report is that the biggest jobs-gaining sector was "Financial Activities": banks, insurance companies, real estate companies and related financial services firms. These are the folks who will be making the big play for this money. "Buy this! Securitize that. Check out this building…" Some of that spending will go to productive use, much of it will go to the financial middlemen being hired right now. Bank stocks have been on a tear and are poised to overtake technology as the S&P's largest sector.

In other words: Here we go again.

The other constituency after that cash are the shareholders who want dividends or for the company to buy their stock. Judging from the Goldman report, most big companies are already doing a bit of both. McDonald's, in the news because some of its low wage employees have walked out, for example says that, "after investing in our business we are committing to returning all free cash flow to shareholders over the long term." Then, they announce they are cutting expansion funds.

What you don't see, in page after page of report, is anyone talking about paying workers more. The word "salary" is referred to once by American Express executives saying that salary costs were flat year over year. The word "wage" shows up only in the McDonald's call, as a complaint about costs. The word "hire?" Google is hiring. The word "compensation" is mentioned only in Goldman Sachs' regulator disclosures.